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Following The “Three Wise Markets”

Boy, oh boy, the Christmas metaphors are in full effect over on the sellside.

Thankfully I haven’t run across any tortured attempts to transform Christmas carols into songs about the market this morning, but I did stumble upon an effort by SocGen to meld the story of the Magi with the story of the bond, FX, and equity markets post-Trump.

It’s short, and worth a read as there are some good points about who’s ultimately in the driver’s seat here as rates, the USD, and stocks all climb inexorably higher into the new year.

As the three wise markets follow their star across the world, the bond market leads, the FX market follows and the equity market decides. This morning, Mr Bond is nervous of the tighter monetary conditions that have come about as rates, yields and the dollar rise in tandem. While the bond sell-off was fueled by stale longs, speculative shorts have now increased dramatically, so nerves aren’t surprising. The dollar is acting as a brake on the extent of Fed tightening and the extent of the bond sell-off. Mr Forex is hyper-sensitive to these bouts of self-doubt by Mr Bond and the dollar has backed off a little on this Monday morning. Mr Equity will decide where we go, because if his nerve doesn’t fail and share prices continue on their march higher, the bond market will learn to live with a stronger dollar and yields will also go higher. And which point the sensitive Mr Forex will simply tag along and drive the dollar higher. That seems the most likely outcome – a bit of self-doubt assuaged by a push to SPX 2300 once the equity market has digested both recent gains and some of the weekend’s mince pies.

Of course the “three wise markets” aren’t following their “star”, but they are following something that sits up high and glows whitish-yellow…

Writing about a subject is the best
way to educate yourself about it, and when I flick through past work I remember how much
they taught me, if no one else. Mainly they taught me that I didn’t know very much. But they
also taught me that most other people didn’t know much either. Thus, some key themes
which stand out include the illusory control of policy makers, the presumed knowledge of
those looking to them to actively do good, the ease with which we fool ourselves, and how
best to protect capital in the face of such unavoidable uncertainty. -- Dylan Grice